Stock market trend: Sideways, With Upward Bias
Market Pulse
Can the stock market go up in a slow-growing economy? This is a question not for just this week but likely for the coming decade. The latest GDP numbers show, as many of the variables in my Always a Winner forecasting model have been suggesting, that the US economy is indeed slowing down and now operating below its full potential output.
In particular, the latest numbers show a 2.4% annual growth rate whereas the American economy’s potential output is well over 3%. While corporations have been making money in this slow-growth environment -- and making money is bullish for the stock market -- the abiding bearish question is whether consumers, far too many of whom are unemployed, can spend enough to sustain a recovery.
If you think about it, there need not be a straight correlation between corporate profits, GDP growth, and the unemployment rate. Corporations that understand that we are in a slow growth mode can readily adapt to that new reality and continue to turn a handsome profit. Sure, it would be better to have faster growth, but this is hardly a necessary condition for profit-making. From this perspective at least, it is possible to have a bull market in a slow growth economy. But that possibility is not yet a reality.
Because traders and investors still are puzzled about whether a Slow Growth Bull is or isn't an oxymoron, the nascent upward bullish trend we have been witnessing still may turn into a sideways pattern once again – or a downward bearish trend if the economy slows further.
So what are investors and traders supposed to do in this Slow Growth market? Longer-term investors continue to remain cautious. There is no hurry getting into this market -- despite the hype you might hear various pundits on the tube.
As for shorter-term traders, there is money being a perhaps but only with appropriate hedging. In my own short-term trading, which deploys only about 20% of my cash, I've been trying to run a hedged portfolio with a ratio of about one short for every two longs. What I find really interesting about this trading at this point is how little most of the stocks are moving and, despite the upward market trend, how a number of my shorts are performing rather well. What this pattern tells me is that my description of the stock market trend last week -- sideways, with an upward bias -- continues to be about right. To put this another way, I just don't feel comfortable going along without having some protection on the downside by shorting some stocks.
Returning to our broad theme of the week, this is what we have come to. While our politicians continue to engage in economic policies that perpetuate slow growth -- higher taxes, more regulation, and an utter lack of fiscal and monetary restraint -- the once mighty US economy has morphed into a tortoise incapable of creating the jobs we need even as the most savvy corporations continue to make money. Does that a bull market make? Only time, and a lot of stress on Wall Street, will tell.
Last take: I include an op-ed article that I did for the Orange County Register almost a year ago and why we should get the hell out of Afghanistan. It is even more relevant today as the situation in Poppy Land continues to deteriorate.
